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Until recently, China was the world’s epicentre for Bitcoin mining – between 65-75% of Bitcoin mining happened there in early 2021. This occurred primarily in four provinces: Xinjiang, Inner Mongolia, Sichuan and Yunnan. However, as the year has progressed, Beijing has been pushing the miners out. In this article, we explore why this has been happening, where miners are relocating and what implications that might have for crypto investments going forwards.
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China’s mining crackdown
The drawdown began in Inner Mongolia earlier in the year. Beijing had set some climate targets that were not being met, and so the province’s leaders issued a 2-month ultimatum for miners to clear out. This is largely because crypto mining is typically a very energy-intensive process, in which vast computing power is needed to create new coins and log transactions.
Crypto migration is largely measured by looking at the “hashrate” within a country (i.e. the combined computing power of miners within a given network). If there is a drop in hashrate then it strongly suggests that mining centres are being turned off within a geographic area. In China, some commentators believe that as much as 50% to 60% of bitcoin’s entire hashrate will leave.
Energy targets are likely a big driving force here, but another explanation could be that Bitcoin threatens the Chinese state. As a decentralised digital currency which cannot be fully controlled, Beijing has long held Bitcoin in suspicion and even disdain – e.g. issuing a ban on financial institutions from engaging with it in 2013.
The “2021 relocation”
Will these Chinese-based miners simply disappear or move elsewhere? Indicators seem to be that they are relocating to friendlier jurisdictions – particularly the USA. As the 2nd-biggest mining destination on the planet (home to 17% of the world’s Bitcoin miners), there is already a healthy level of infrastructure in place to help support additional intake.
First of all, the USA has already been building up its hosting capacity for many years. In late 2017, when Bitcoin crashed, publicly-traded crypto mining companies (e.g. Core Scientific) seized an opportunity to build up large crypto farms using cheap money. In 2020, the onset of COVID-19 also provided a boost to many of these companies through stimulus payments.
Secondly, the USA – as a democracy and free market economy with private property right protections – provides extra protections for miners that are not as available in China. There is less chance of a Bitcoin “crackdown” in such an environment, for instance, even if Congress may currently be discussing tighter crypto regulations. Finally, the USA is one of the cheapest places on the planet for accessing renewable energy. Since miners operate in a low-margin industry and their variable cost is energy, this is a major incentive.
One understandable investor concern – as China cracks down on miners in 2021 – is that cryptocurrencies will sustain a downward value trend as miners struggle to relocate and even exit the market entirely. So far, evidence suggests that this is not happening – which has helped encourage a gradual recovery in Bitcoin prices since the summer. Whilst it has not gone back up to its high-point over over $64,000 in April, it currently stands at $41,000 – up from its 52-week low of about $10,000.
However, this is not to say that miners have a “free run” in the USA for the coming months and years. In 2021, Congress has introduced 18 bills to the floor on the subject of Bitcoin and blockchain regulation – such as the Blockchain Regulatory Certainty Act. The bill that appears to have made the most legislative progress so far is the Eliminate Barriers To Innovation Act of 2021, which would create a joint “crypto taskforce” to regulate digital assets. There are also rumblings of at least 10 US senators wanting to examine the implications of China’s desire to create its own digital currency, with some mulling the creation of a “digital dollar”. These could bring significant disruption to the current crypto landscape.
A major factor in the evolution of the crypto landscape going forwards will be the development of renewable energy sources and whether/how these are adopted in wider society. As the world moves away from fossil fuels, debate continues over the role that Bitcoin plays in the transition. Many view the crypto currency as an “energy hog” that the world could do without. However, crypto technologies continue to improve – including hardware efficiencies for mining – which may enable crypto assets to sit more comfortably within a future “renewable energy landscape”. One interesting study, for instance, suggests that Bitcoin mining follows the rainy season and cheap hydropower. This suggests that miners could actually play a role in driving further innovations in renewables and power supply.
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